Global insurance industry executives ranked a global pandemic, a large scale natural catastrophe, and a food/water/energy crisis as the three most important extreme risks for the insurance industry to worry about in the long term, according to a survey conducted by Towers Watson.
Other top 10 extreme risks included cyber-warfare, an economic depression, a banking crisis, and a default by a major sovereign borrower. The consideration of these extreme risks can be useful in helping insurers design more robust risk management processes, Towers Watson said.
“Much as we would have expected pandemics and natural catastrophes to figure prominently in insurers' extreme risk thinking, the high rankings of concerns such as cyber-warfare and a major data compromise in the cloud (user-submitted idea) illustrate how the industry is keeping up to date with risk assessment,” said Stephen Lowe, senior consultant for risk consulting and software at Towers Watson.
Among the top 10 extreme risks identified by survey participants, Towers Watson sees a range of implications for insurers. For example, the impact of a food/water/energy crisis includes a potential impact on morbidity and mortality, and the creation of investment winners and losers.
In the case of a sovereign default, Towers Watson believes that as well as the impact on those insurers holding debt in the defaulting country, it would in all likelihood result in a regional insurance crisis and an increase in mergers and acquisition activity due to forced disposals from banking groups.
The impact of a prolonged economic depression also can be complex: Although it can adversely impact the top line, based on the experience of many European motor insurers, the pressure on household finances would lead to a reduction in vehicle miles and, in turn, to reductions in claim frequency and an increase in profitability.
“We were delighted to get such a geographically diverse and high response rate to the survey. The kinds of risks that could wipe out an insurance business do inevitably evolve over time, so we were very encouraged to see this degree of engagement from a broad sample of the industry,” said Mr. Lowe.
The survey was carried out as an extension of the company's regular biennial analysis of the extreme risks likely to affect the broader investment community. That research and ranking, titled Extreme Risks 2013, categorizes very rare events that would have a high impact on global economic growth and asset returns if they occurred. Votes were compiled in a wiki survey, which enabled participants to add their own ideas. Over 30,000 votes were cast.
Here are the top 10 extreme risks facing the insurance industry, according to the survey:
1) Pandemic: A new, highly infectious, and fatal disease spreads through human, animal, or plant populations worldwide;
2) Natural catastrophe: A confluence of major earthquakes, tsunamis, hurricanes, flooding, and/or volcanic eruptions with major global effects;
3) Food/water/energy crisis: A major shortfall in the supply of, or access to, food/water/energy, causing severe societal issues;
4) Cyber-warfare: Computer sabotage/espionage on a major scale, with severe damage to infrastructure, financial, medical, or defense systems;
5) Technology: A large quantity of personal, government, or business data stored in clouds are found to be hacked, compromised, or misused;
6) Depression: A deep and protracted trough in economic output, massive increase in unemployment, restriction of credit, and shrinking investment;
7) Banking crisis: Central banks unable/unwilling to supply liquidity in the next crisis, causing banking and real economic activity to stop
8) Extreme event: An extreme event that causes property damage, supply-chain failures, business interruption, and death on a significant scale
9) Rise in extreme weather: Events exceed the capacity of insurance industry and governments to respond, with physical and social implications; and
10) Sovereign default: Nonpayment by a major sovereign borrower causes market panic and disrupts the global economy.
Victoria Spears
Victoria Prussen Spears is senior vice president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. A graduate of Sarah Lawrence College and Brooklyn Law School, Ms. Spears was an attorney at a leading New York City law firm before joining Meyerowitz Communications. She may be contacted at [email protected].